Untitled Flashcards Set

• gross domestic product – the total market value of all final goods and
services produced within a society over a certain period of time
• intermediate good – a good used in the production process that is not a final good
or service
• consumption expenditures – purchases of newly produced goods and services
by households (denoted by C )
• private investment expenditures – purchases of newly produced goods and
services by firms (e.g., spending on new plants and equipment) (denoted by I )
• government purchases – purchases of newly produced goods and services by
local, state, or federal government (denoted by G )
• import – a good or service produced in a foreign country and purchased by
someone in the home country
• export – a good or service produced in the home country and sold in a
foreign country
• net export – exports minus imports (denoted by NX )
• trade deficit – the excess of imports over exports
• trade surplus – the excess of exports over imports
• Y = C + I + G + NX
• real GDP – the value of GDP computed using prices from an arbitrary base year (i.e.,
a measure of GDP that controls for changes in prices, since across different periods
goods/services are valued at common, constant prices)
• nominal GDP – the value of GDP computed using current period prices
• real GDP per capita – value of real GDP divided by total population of the country
• Industrially Advanced Countries (IAC’s) – high income countries with primarily
market based economies, large stocks of technologically advanced industrial capital,
and a highly educated and skilled workforce (e.g., U.S., Norway, Australia,
Germany, Japan)
• Less Developed Countries (LDC’s) – lower income countries which are held
back by some combination of poor economic institutions, undeveloped industrial
capital, and/or an uneducated and unskilled workforce (e.g., India, Ghana,
Bangladesh, and the Democratic Republic of the Congo)
• economic development – improvements over time in a society’s quality of life
and living standards
▪ by definition, very qualitative in nature
▪ includes, but not limited to, increased consumption of material goods/services
• economic growth – sustained increases over time in a society’s value of Real GDP
▪ graphically illustrated by an outward shift of the PPF
▪ measured quantitatively as the percentage increase in Real GDP
• GDP growth rate – annual percentage change in the value of real GDP
• catch-up effect – conjecture that (all other factors fixed) the growth rates of less
developed countries will exceed the growth rates of developed countries, allowing the

less developed countries to “catch up” over time
• Rule of 72 – the observations that a variable that grows at a constant rate of “X%
per period” will double in value in approximately “(72/X) periods”
• physical capital – machines, building, factories, and other equipment used in
the production process
• human capital – the knowledge, education, skills, experience, work ethic,
inter- personal skills, and other attributes of workers which determine
productivity
• technology – the application of scientific and engineering principles to the
problem of production
• Four broad sources of economic growth (i.e., changes that would lead to an
“outward movement of PPC over time”)...
1. Increases in the quantity of labor (i.e., more workers)
2. Increases in the quantity of physical capital (e.g., more factories,
trucks, computers, electricity plants)
3. Improvements in quality of labor (e.g., workers are more highly educated/skilled)
4. Improvements in technology
• three common ways to achieve economic growth:
1. Deliberate investments in human capital and physical capital (either by individuals
or society) => when a society devotes more resources to producing capital goods
today, they will have more capital goods available in the future (but, at the
expense of having fewer consumer goods in the present period)
2. Deliberate investments by society in overhead capital (overhead capital – basic
infrastructure such as railways, roads, telecommunications networks, electricity
supply systems, water supply systems)
3. Realize improvements in technology which fundamentally alter the type of capital
available or the production process => most economic growth in recent decades
and centuries has come from improvements in technology
• three impediments to achieving growth:
I. difficulties in developing physical capital
• Vicious-cycle-of-poverty hypothesis – conjecture that poor countries will
remain poor since they do not have sufficient resources available to make the
investments in capital which are necessary for economic growth
• Capital flight – tendency for wealthy people in poor countries to invest their
financial capital abroad instead of at home
II. difficulties in developing human resources
• poor health outcomes degrade human resources
▪ 2015: 438,000 malaria deaths (90% in Africa)
▪ 2014: 1.2 million AIDS-related deaths (65% in Africa)
• brain drain – tendency for the most highly talented people from developing
countries to become educated and then move to an already wealthy country
III. poor legal, political, and economic institutions
• Rule-of-Law – environment in which property rights and contracts are
respected and administered fairly and transparently, without favoritism
▪ countries lacking rule-of-law have difficulty achieving growth
• Crony Capitalism – environment in which well-connected unscrupulous
business people use corrupt political systems to their advantage in order to
obtain preferential treatment from government (e.g., government contracts,
subsidies, bailouts, tax loopholes)
▪ in such an environment, the efficient use of resources is distorted to
the detriment of economic growth

• Government ownership/control of productive resources (i.e., a reliance
on planning instead of markets, socialism instead of capitalism)
▪ government ownership of resources removes profit motive => reduced
incentive to create value and innovate to reduce costs (dampening
economic growth)